The New Risk Management Frontier for Financial Institutions

Basel III, Dodd-Frank and other new regulations have changed the ways in which financial institutions (FIs) think about financial controls. There are, however, other risk management needs behind the scenes that are equally critical for FIs to consider in this new environment. Banks must focus on implementing new capabilities and services to ensure better internal transaction controls through improved back-office reconciliation and exception management processes.

Like cars, banks don’t drive themselves. Just like drivers depend on mirrors to reveal blind spots, disparate spreadsheets and outdated reconciliation systems increase risk exposure by preventing banks from clearly seeing and understanding their operations. Whether mandated by regulatory agencies or boards of directors, financial institutions must ensure that transactions are completed as intended and that exceptions are resolved. These efforts require ongoing examination of general ledger accounts, corresponding banking accounts, securities trading accounts and more. Because exceptions represent the manifestation of transaction-based risk, it is critical for banks to quickly identify not only the exceptions, but also their origins. And for this they need to have the ability to compare transactional data from multiple sources and a clear audit trail that speeds resolution, satisfies compliance mandates and mitigates operational risk within the institution.

Challenges for mid-tier banks

Regulators and central banks have repeatedly emphasized the importance of establishing plans to detect and reduce processing errors. These demands are especially true for mid-tier institutions with between $1 billion and $20 billion in assets - because while larger banks with more than $20 billion in assets have been addressing these concerns for years, mid-tier banks are only now heeding the call and exploring technology options that can enable a more efficient enterprise control of reconciliation.

Larger banks frequently deploy automated reconciliation solutions that identify exceptions and mismatches between two or more sets of books and records. Larger institutions also have dedicated IT resources that support technology, whereas most mid-tier banks only have a single reconciliation group responsible for monitoring all transaction types across the enterprise. And due to the widely prevalent manual processes, reconciliation for mid-tier banks is time-consuming and prone to serious risks.

To perform reconciliation across the enterprise, most mid-tier banks must use disparate systems that are costly to maintain, difficult to integrate and present significant barriers to aggregating data and generating management reports. Such institutions ideally require a single reconciliation system that can extend support across the enterprise. Forward looking banks should, therefore, invest in reconciliation solutions that enable centralization of data and embrace knowledge management tools that facilitate preemptive resolution methods combined and end-to-end exception management processes.

The time is now to minimize back-office risk

Two factors have escalated the need for mid-tier banks to demand affordable reconciliation solutions that provide control with minimal need for contracted support. First, an increase in pressure from regulatory mandates requires management and outside auditors to report on the adequacy of internal controls. Second, banks today have a desire to leverage market opportunity and capture market share across their market segments.
Without strong financial control platforms, banks could miss out on acquiring valuable customers because they won’t be able to support increases in volume or lower their cost base to compete with institutions that have already transformed their back offices.
Today, banks are well positioned to increase market share against non-financial competitors threatening to poach customers and transaction volume. Mid-tier banks must recognize that success will depend on their ability to achieve back-office efficiency and comprehensive risk mitigation. Implementing an automated reconciliation platform will provide the control necessary for banks to navigate and triumph in a quickly changing market.

Relying on disparate spreadsheets for outdated reconciliation systems is risky if bank executives need to sign off on their internal controls for regulatory auditors. A single high-tech reconciliation system would cut across all the data and give them visibility into their risks across the enterprise.